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Published on Saturday, May 3, 2008 by The American Prospect

McCain's Delusional Tax Plan

by Robert Gordon and James Kvaal

McCain's top policy advisor Douglas Holtz-Eakin claims that such a write-off has no long-term cost. In fact, when Holtz-Eakin headed the Congressional Budget Office, it concluded that a similar, smaller proposal cost $440 billion over a decade. Reagan tax official Ron Pearlman labeled Holtz-Eakin's claim "so intellectually dishonest it's outrageous."

In addition to covering up the true cost of its corporate tax cuts, the McCain plan has another serious flaw: Companies can use new investments to shelter profits from other parts of their business from tax. Other advocates of immediate investment write-offs, such as George Bush's tax reform panel, considered it "essential" to also eliminate the deduction for business interest. But revisiting the interest deduction raises a host of thorny problems for Wall Street, and McCain has simply ignored this hole in his plan.

For individuals, McCain proposes repealing the Alternative Minimum Tax, the parallel tax system that was intended to prevent tax sheltering but now threatens millions of middle-class families with higher taxes and more complexity. Millions of taxpayers are required to calculate their taxes under two systems -- the regular tax code and the AMT -- and pay the higher sum. Because the AMT is not indexed for inflation, it threatens more middle-class families every year.

Congress has repeatedly passed temporary solutions that exempt most of the middle class from the AMT, but McCain would go further and repeal the AMT entirely. This approach would cost $60 billion more a year than the temporary patches do, and 57 percent of that money would flow to the top 1 percent of households. McCain could have solved both the cost and fairness problems by replacing the AMT with a modest surtax on the households benefiting from its repeal, but he did not. Once again, he chose all dessert and no vegetables.

McCain's final tax proposal is doubling the tax exclusion for dependents, costing $65 billion and helping most families with children. In essence, each family would be able to deduct an additional $3,500 for each child. This means that a millionaire, who is in the 35 percent tax bracket, would get $1,225 per child, while a steelworker, who is in the 15 percent tax bracket, would get $525. Families in poverty would get nothing because they pay no income taxes, even though they pay thousands in payroll and sales taxes.

Here, too, McCain had alternatives. Liberals have suggested consolidating tax benefits for children into a simpler, unified credit that is especially beneficial to working-class families who do not receive the earned income tax credit. Similarly, "Sam's Club conservatives" Ross Douthat and Reihan Salam have suggested baby bonuses to help new families with children.

If McCain had taken these alternatives, his tax plan would still be costly but it would have had more for families and less in corporate giveaways. He could have railed with equal passion for tax cuts and for tax reform; for toughness on corporate special interests and fairness and growth for ordinary businesses and families.

To pay for his $300 billion a year in tax cuts, McCain has made only two significant proposals. He would freeze discretionary spending besides that on defense and veterans, saving about $15 billion but hurting good programs and bad, and he would eliminate earmarks, saving as much as $18 billion a year.

McCain initially claimed that eliminating earmarks would save $100 billion, but abandoned that claim after Scott Lilly pointed out that his figure included the entire Israel aid budget as well as military housing. Even the $18 billion figure is inflated since McCain now admits that some of these earmarks have value, like the ferry in the depressed Delta community he visited last week.

To pay for the rest of his tax cuts -- some $270 billion, nearly 90 percent of the total -- McCain turns to obfuscation. He promises to review a White House list of wasteful spending and a Treasury Department list of corporate tax loopholes and create a blue-ribbon commission that will, presumably, draw up another list that will need further review. But so far he has not endorsed actually cutting any programs on these lists.

Depending on your perspective, McCain's agenda is either empty or terrifying. It is empty in the sense that McCain offers an array of budget-cutting gimmicks that dwarf Reagan's magic asterisk. But McCain's tax cuts are terrifying because, as Jared Bernstein has argued in these pages, they would eventually trigger a budgetary crisis that transforms deep spending cuts from unthinkable to inevitable.

It's hard to know if McCain is intentionally pursuing a dramatic downsizing in the government role, but it's clear to his supporters. Conservative activist Grover Norquist -- who once feuded with McCain but now praises his tax agenda -- has been clear about his desire to shrink government "down to the size where we can drown it in a bathtub." Marxists used to say "the worse the better," aiming to "heighten the contradictions of capitalism." This is the Norquist approach to our budget these days, and the implicit logic in McCain's as well.

McCain's strength as a candidate is rooted in his claim that he is a man who talks honestly and stands up to special interests. But now, on the central issue of this election, he has an agenda that does neither. With corporate giveaways and phony freezes and scrubs, McCain's tax agenda undermines his core political appeal.

Robert Gordon is a senior fellow at the Center for American Progress.

James Kvaal is a Domestic Policy Advisor at the Center for American Progress. He works with the Action Fund's Hyde Park Project, which seeks to drive the ideological debate on the key policy issues facing our country.
© 2008 The American Prospect

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